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Former Enron CEO Jeffrey Skilling's counsel delivered the opening brief to the U.S. Court of Appeals for the Fifth Circuit challenging the convictions -- although "brief" may not be entirely accurate as the filing comes in at a hefty 237 pages, roughly 60,000 words according to the Wall Street Journal Law Blog (here). Former Acting Solicitor General Walter Dellinger, head of the appellate group at O'Melveny & Myers, likely will argue the case on Skilling's behalf.

Skilling's brief makes four main arguments for reversal of the conviction: (1) the "right of honest services" theory in the indictment as one basis for finding the mail/wire fraud conspiracy has since been discredited by the Fifth Circuit, and affects the other counts requiring their reversal; (2) flawed instructions on "materiality" and "deliberate ignorance" (aka the Ostrich Instruction); (3) prejudice from the denial of the change of venue motion; (4) insufficient voir dire to allow Skilling to flesh out prejudice. Skilling's strongest argument is the first, based on the Fifth Circuit's decision in U.S. v. Brown, 459 F.3d 509 (5th Cir. 2006), issued in August 2006 -- about three months after his conviction -- that overturned the fraud convictions of defendants in the Enron Nigerian Barge Trial. The court held that an employee who believes his acts were for the benefit of the corporation cannot have the intent to deprive the company of the person's honest services. That theory was one of three charged in the indictment for the fraud conspiracy count, and because the jury did not identify which theory was the basis for its conviction, the charge will in all likelihood be reversed. In fact, the federal prosecutors may well concede that the conspiracy count must be reversed under Brown, a position the government took in the district court on review of convictions of one defendant in the Enron Broadband Trial.

Even if the conspiracy count gets reversed, the interesting question is how much effect the flawed honest services theory will have on the other convictions. The defense brief argues that all the other counts must be reversed because of prejudicial spillover from the evidence admitted on the improper conspiracy count. The government's likely response will be that at least the false filings with the SEC and insider trading counts should survive because they are unrelated to the conspiracy count. The insider trading charge does not require proof of a scheme to defraud in the same way that the mail/wire fraud conspiracy count does, being based on trading while in possession of material nonpublic information in breach of a duty of trust and confidence. The false filing counts do not require any intent to defraud, and so may be sufficiently distinct that the error from the honest services fraud theory does not affect them. The Fifth Circuit will have to assess the prejudice arising from the improper instruction on honest services, which is very hard to predict.

I think the other arguments are more difficult for Skilling to win. The jury instruction issues will require the court to analyze whether U.S. District Judge Sim Lake made legal errors, and then an assessment of prejudice if there were any. In Skilling's favor is the fact that the honest services issue could have its own spillover effect if the Fifth Circuit finds error in the instructions, making it easier to find prejudice and reverse the convictions because of the number of errors in the trial. The venue and voir dire claims are very hard arguments to win because the district court has wide discretion in those areas, and cases with far more prejudicial news coverage than this one have survived venue challenges.

Skilling's final argument concerns his sentence of more than 24 years in prison, which he has already begun serving. Assuming the conspiracy conviction is overturned, then even an affirmance on the other counts probably would require a resentencing so that Judge Lake can base the sentence on only those convictions upheld by the Fifth Circuit. Whether the reasonableness argument gains traction with the Fifth Circuit remains to be seen. The court did reject a similar sentence in the Jamie Olis case, also handed down by Judge Lake, although the loss calculations were different given the demise of Enron versus the continued viability of Dynegy, Olis' former employer.

The filing is available below, but check to make sure you have enough ink in the printer if you decide to go that route. (ph)

The definition and inclusion of honest services as a basis for a fraud conviction is controversial in part because of the language used by Congress in trying to restore a theory that would allow the government to prosecute alleged frauds after the United States Supreme Court rejected intangible rights cases in the McNally decision.

Can anyone really say what "honest services" means? And the problem of discerning the meaning of this phrase is especially problematic when someone is acting to benefit their company. Couple this with a first offender receiving a 24-year sentence for committing an alleged crime that may not be a crime, makes this appeal one that deserves close scrutiny.

Louisiana Representative William Jefferson filed a number of motions challenging the corruption charges filed against him in the Eastern District of Virginia in June 2007. The fifteen motions include requests to dismiss the counts, to suppress evidence, to change the venue in the case to Washington D.C., discovery requests, and to strike surplusage from the indictment. The venue motion, available below, seeks to dismiss certain counts, including the RICO charge, because venue is improper in Virginia, and to change venue for the remaining counts to the District of Columbia on equal protection grounds because of the racial makeup of the Eastern District. The motion states: "The government’s purposeful actions in creating and seeking venue in Virginia raise equal protection concerns similar to those addressed by the Supreme Court in Batson v. Kentucky, 476 U.S. 79 (1986). Just as prosecutors may not employ their peremptory challenges to exclude members of the defendant’s race from the jury, they should not be permitted to exercise their discretion to select the forum to accomplish the same result." Representative Jefferson has also requested discovery on the government's venue decision and an evidentiary hearing on the issue. Discovery of the government's decision-making process is difficult to obtain, and the claim of an equal protection violation in the selection of the venue may well be one of first impression.

The investigation of Representative Jefferson involved search warrants, which are uncommon but certainly not unknown in white collar cases, particularly public corruption cases lately involving federal elected officials, such as a Representative from California and Senator from Alaska. The claim regarding the search of the home in Louisiana presents an interesting issue: Can the government make digital photographs of documents that it finds in the search but cannot seize because they are outside the scope of the warrant? (Motion available below) A warrant that allows the seizure of documents would authorize a review of the contents of records found at the location identified, but once the document is determined to fall outside the warrant it's not clear whether the government can make a record of its contents and use that in its investigation. The items were not illegally seized, at least in a physical sense, because the agents could examine them at the house, and plain view allows at least a cursory review. But photographing them in a way that effectively allows the government to gain the benefit of obtaining a copy of the contents even if the piece of paper remains at the house certainly sounds like a seizure. New technology again confronts the limits of the Fourth Amendment's protections. The Fourth Amendment challenge does not inlcude the search of Representative Jefferson's Virginia home, where $90,000 was found in a freezer -- perhaps the key physical evidence in the case.

A third motion, also available below, concerns suppression of statements Representative Jefferson made to FBI agents during the search of his Louisiana home. While Miranda rarely comes up in white collar cases, questioning during the execution of a search warrant can trigger an issue about whether it was a custodial interrogation or a voluntary interview. The questioning took place in his home, which makes it less likely he was in custody, but Representative Jefferson alleges that he did not feel free to leave the presence of the agents, and they accompanied him to the bathroom at one point, requiring him to leave the door open. Whether the facts are sufficient to constitute "custody" to trigger the right to receive Miranda warnings remains to be seen. (ph)

Hyundai Motor Group CEO Chung Mong-koo had his three year jail sentence for diverting over $100 million from the company into a political slush fund suspended by the Seoul High Court in favor of what is in effect five years of probation. Hyundai accounts for approximately 7% of Korea's exports, and Chung's absence likely would have caused significant problems for the company because of the degree of control he exercises over the organization. Along the lines of the old "too big to fail" approach to banks and other large industrial enterprises in the 1980s -- remember the Chrysler bailout? -- the appellate court viewed the collateral consequences on the country's economy from sending away Korea's second wealthiest man as more important than enforcing the sentence. While the argument is sometimes made at sentencing in the U.S. that the leader of a company, usually a closely-held one, is too important to the business to be incarcerated, it would be very unlikely that any one individual in the United States would be viewed as so important to a publicly-traded company that he or she could not be removed as CEO to serve a jail sentence -- even at a company that makes iPods, iPhones, and other cool gadgets. A Reuters story (here) discusses the sentencing. (ph)

The resignation of Alberto Gonzales, effective September 17, 2007, caps a run of departures -- the head of the Civil Division just announced his resignation (here) -- from the upper reaches of the Department of Justice that leaves few leaders who hold Senate-approved positions. According to Roll Call (here), the White House has floated some names on Capitol Hill as possible successors to serve as the eighty-first Attorney General. The possible nominees reportedly are: former Solicitor General Ted Olson; former Attorney General Bill Barr; former Deputy Attorney General George Terwilliger; Senior D.C. Circuit Judge Laurence Silberman; former Deputy Attorney General Larry Thompson; and former U.S. District Court Judge Michael Mukasey, who served in the Southern District of New York.

An interesting question will be how much the White House wants to "calm the waters" after the controversies that surrounded Gonzales this year by choosing someone who at least appears to be above (or outside) the political fray. All of those listed have political ties, to be certain, although Barr has been with Verizon as its GC for a number of years, so he has been largely absent from Washington during the current Bush Administration. He served as the AG under the first President Bush and was quite well regarded, so he could well be a "safe" candidate. Similarly, Mukasey left the Southern District as Chief Judge in 2006 and returned to private practice at his earlier firm, Patterson Belknap, so he too has been absent from the political battles and would likely be a safe nominee. Let the rumor-mill run rampant now. (ph)

Shades of Abscam, albeit on the much more local scale. The U.S. Attorney's Office for the District of New Jersey announced that ten elected officials and the chief of staff to the president of the Newark City Council were arrested for taking bribes from an insurance brokerage company that was an FBI front. According to the press release (here), the elected officials are "five members of the same local Atlantic County school board, two state Assemblymen from Passaic and Essex Counties, the mayor of Passaic and one current and one former Passaic city council member . . . ." Considering the disastrous consequences of being accused of accepting bribes, the amounts involved are fairly small, from $1,500 to $17,500, hardly enough to risk one's entire career. According to the federal prosecutors:

Pleasantville School Board members allegedly took thousands of dollars in bribes from the cooperating witnesses. The circle of corruption widened when certain Pleasantville school board members referred the cooperating witnesses to public officials in northern New Jersey who also took bribes and, in turn, put the cooperating witnesses in touch with still other corrupt public officials, according to the Complaints. The investigation included hundreds of tape-recorded and/or videotaped encounters, during which the officials charged in the complaints openly expressed their desire to enrich themselves using their public positions and influence. The defendants accepted corrupt payments ranging from $1,500 to $17,500 at any one time. In most cases, the defendants sought to establish and perpetuate a corrupt relationship with the cooperating witnesses to continue receiving bribes.

A former executive and co-founder of telecommunications company UTStarcom Inc. settled an SEC civil complaint alleging he and his wife sold shares of the company shortly before it planned to announce that it would not meet its earnings target for the quarter. The SEC Litigation Release (here) states that

In late September 2005, UTStarcom failed to finalize a significant deal and the company was preparing to pre-announce to the market that it would not be able to meet its earnings guidance for the quarter. According to the Commission, Shey spoke to the UTStarcom executive by phone the weekend before the public announcement. Shortly after that conversation, Shey contacted his broker and began the process of liquidating his extensive UTStarcom stock holdings.

According to the complaint, just minutes after the market opened on Monday, October 3, Shey began selling his UTStarcom stock, and Shey's wife began selling UTStarcom stock in accounts of her family members. Shey sold more than 600,000 shares over the following days, making his final sale less than an hour before UTStarcom announced the revenue shortfall on October 6. Following that announcement, the company's stock price fell by more than 26 percent.

The defendant settled the SEC action by disgorging $420,226.60 representing the losses avoided by the sales, plus prejudgment interest of $31,909.96, and payment of a one-time civil money penalty. (ph)

As the investigations of corporate options backdating wind down, the next source of cases for the white collar crime departments at major firms is appearing on the horizon: investigations of companies that received contracts as part of the Iraq rebuilding effort. As discussed in an earlier post (here), the Department of Defense Inspector General will be heading to Iraq with a team to look into the award of billions of dollars worth of contracts, and Capitol Hill will be conducting hearings on the contracts. According to a story in TheNational Law Journal (here), "The war in Iraq has an army of high-profile attorneys working to steer defense contractors through a minefield of lawsuits and federal investigations involving war profiteering and fraud." Here is the primary selling point to firms facing increased scrutiny: "The first step in surviving a government inquiry: Get the right lawyer." Well, of course that's what you have to do, silly, and don't ask how much it will cost, because you can't really know and probably won't want to think about it as the bills for a cadre of lawyers for the company and individual officers come rolling in. (ph)

A former vice president at Morgan Stanley and her husband, a former analyst at a hedge fund, pleaded guilty to conspiracy and insider trading charges. The defendants had been charged earlier this year with making over $600,000 on trading in three companies based on tips from the wife to the husband, who bought the securities through an account in the name of her mother. The defendants agreed not to appeal a sentence between 30 and 36 months, which means they will each be serving a substantial term of imprisonment. A story on CNN.com (here) discusses the guilty pleas. (ph)

High end retailer Saks Inc. settled an SEC accounting reporting and books-and-records complaint (here) by agreeing to a permanent injunction, but it will not have to pay a civil penalty for the accounting irregularities. The problems occurred from the mid-1990s until 2003 at its Saks Fifth Avenue division, and involved improper accounting for vendor allowances and deferrals of product markdowns to pump up income. According to the SEC Litigation release (here):

One of the practices involved the intentional understatement, by the SFAE [Saks Fifth Avenue Enterprises] buyers to vendors, of the sales performance of the vendors' merchandise. Based on that misinformation, SFAE collected from the vendors millions of dollars in "vendor allowance" payments to which the Company was not entitled. Over a dozen SFAE employees participated in the vendor allowance over-collection practice, which continued for at least eight years, from 1996 until 2003.

The second deceptive practice involved the improper deferral (or "rolling") of permanent markdowns from one period to another at SFAE. Permanent markdowns were the means by which Saks recognized that inventory on the sales floor could not sell at the existing retail price, i.e., was impaired. The effect of a permanent markdown on Saks' financial statements was to reduce the value of all inventory subject to the markdown on Saks' balance sheet and also to increase its expense for cost of goods sold, thus reducing the net income reflected on the Company's income statement. Thus the improper rolling of markdowns resulted in Saks' overstatement of its inventory and net income in some reporting periods from which permanent markdowns were deferred.

The decision not to impose a monetary penalty against Saks is part of a continuing trend in which companies are allowed to settle SEC actions involving accounting with no additional financial consequences to the company when the harm from the misconduct has already hit investors with a decline in the stock price. (ph)

A former Wall Street investment banker received a 50-month prison term after his conviction on tax evasion charges related to the use of tax shelters back in the 1970s and 1980s. The tax evasion occurred from 1977-1985, and the case involved the defendant's continuing efforts to avoid paying taxes after a determination of the amount owed. In addition, among other charges was a claim that the defendant did not pay the required "nanny tax" for a live-in household employee, the reporting problem that tripped up President Clinton's first nominee for Attorney General back in 1993 -- remember those quaint old days when that was the biggest issue facing the Department of Justice? A press release on the sentencing issued by the U.S. Attorney's Office for the Southern District of New York is available below. (ph)

The SEC's insider trading investigation of questionable options purchases in Placer Dome in October 2005 has taken an international turn as the Commission is seeking authority to interview witnesses in Canada, the U.K., and the Isle of Man. On October 31, 2005, Barrick Gold Corp. made a hostile offer for Placer Dome, and as happens in so many deals, there was questionable trading in Placer Dome before the announcement. Both companies are headquartered in Canada, and the SEC recently made a filing in federal court in New York seeking judicial authorization to require witnesses outside the United States to testify in its investigation. The SEC filed an "unknown traders" suit on November 3, 2005, to freeze the $3 million proceeds of the Placer Dome options trading (see SEC Litigation Release here), and has identified the primary investor in Toronto. The SEC is now trying to trace who might have been the source of the information.

While the federal court has subpoena authority to compel witnesses to appear in the U.S., the Commission has to resort to the foreign courts and foreign securities regulators to obtain evidence abroad. In its filing, the Commission cited an e-mail sent on October 23, 2005, by the Toronto investor who purchased the Placer Dome call options that states, "I hear from the Swiss lads that G is running at PDG. Act accordingly." "G" is the ticker symbol for Barrick Bold, and "PDG" the symbol for Placer Dome. There's more than a little smoke coming from that e-mail, which likely means a criminal investigation for insider trading. A Globe and Mail story (here) discusses the SEC filing. (ph -- with thanks to YH)

Two staffers for Rep. John Doolittle (R. California) have been subpoenaed to testify before a grand jury. According to the press (Fox here) the investigation stems from lobbyist Abramoff's investigation and later conviction. In April, Rep. Doolittle's home in Virgina was searched. (See Washington Post here and blog here).

Oscar Wyatt's trial starts today. The indictment against the 83 year old businessman comes out of an investigation of the U.N. oil-for-food program. Wyatt faces charges claiming that he paid kickbacks to individuals in "Saddam Hussein's regime to win contracts under the United Nations' oil-for-food program." (See Houston Chronicle here and here) For background on this case and other matters related to the oil-for-food program see here, here, and here. Tom Kirkendall at Houston Clearthinkers has a copy of the Indictment here and some background here.

NPR's All Things Considered had a program on government corruption in Iraq. The focus of this program is a draft report obtained by NPR in which U.S. investigators discuss the effect of corruption on government resources in Iraq.

The American Bar Association and the American Banker's Association have a upcoming Money Laundering Enforcement conference. The keynote speech will be given by Robert Mueller, the Director of the FBI. For details see here.

The 11th Circuit came down with a case that has an interesting 5K1.1 issue. Although the case itself is not a white collar case, the holding clearly could apply in this context. The 11th Circuit reversed and remanded a case (U.S. v. Dorsey) where the accused argued that he was denied the government's filing of a 5K1.1 motion when he decided to proceed to trial. The court stated:

"We have not previously considered whether the government’s refusal to file a § 5K1.1 motion because the defendant exercised his right to a jury trial constitutes an unconstitutional motive. We now hold that it does, but we are unable to determine whether that is what took place in this case because of insufficient fact-finding at the district court."

The court also stated:

"Accordingly, we agree with our sister circuits and hold that refusing to file a section 5K1.1 motion in retribution for exercising the Sixth Amendment right to a trial by jury is an unconstitutional motive under Wade."

The court remanded the case for fact finding to determine whether there was an improper deprivation of the filing of a 5K1.1 motion. The opinion can be found here. Attorney Mark P. Rankin's (Carlton Fields) Brief can be found at 2006 WL 4471028.

The program will bring together experts to explain the McNulty Memo, its background and meaning for practitioners in white-collar prosecutions, internal investigations, civil litigation, and everyday corporate practice. Our faculty will offer insight into how DOJ is actually implementing the McNulty Memo, its significance for other government agencies, how lawyers are practicing in light of it, and how critics are taking steps to achieve further restraints.